Banks tighter on credit as lower crop prices bite

Banks in the US Midwest have started tightening agricultural loan criteria amid expectations of a farm sector slowdown, which saw farmland prices in the top US corn and soybean producing state falling for the first year since 1998.

More than one-in-four banks in states including Illinois, Iowa and Indiana tightened credit standards for farm loans in the October-to-December period, compared with a year before, according to the Federal Reserve, the US central bank.

That compared with a 7% rise reported for the previous quarter, and contrasted with just 1% of banks which eased lending criteria.

"Credit availability was somewhat more restricted than a year ago," said the Fed's Chicago bank.

'Major reversal'

The move by lenders comes amid expectations of a dent to farm income from lower crop prices, prompted by a sharp rise in yields of major crops last year and bumpers harvests in many rival exporting countries, such as Brazil, too.

In separate signs of a deteriorating, if still relatively buoyant, agriculture sector financial conditions, a loan repayment index kept by the Chicago Fed fell to its lowest since 2010, and a loan demand index to a six-year high.

"Agricultural credit conditions deteriorated," the bank said.

Despite the rise in loan demand, "in a major reversal from a year ago", farmers' capital spending on items such as land, buildings and machinery was seen falling by more than half the lenders surveyed by the Fed, compared with only less than 10% foreseeing more investment.

'Cast a pall'

The waning prosperity was seen hitting the farmland market too, with 41% of bankers forecasting lower prices ahead, compared with 3% seeing rises.

"Combined with expectations of diminished farmland purchases by farmers in 2014, these survey responses cast a pall over the spectacular growth in agricultural land values of the past few years," the bank said.

Even allowing for inflation, the region's land prices are nearly twice the level reached at the end of the last boom, in 1979, which preceded a sharp retreat in values, as interest rates soared.

Iowa decline

In fact, farmland prices in the bank's district, which also covers Michael and Wisconsin, maintained growth in 2013, by 5%, although this represented a sharp slowdown from the 16% seen in 2012, depressed by the first fall in Iowa values since 1998.

Prices in Iowa, the top corn and soybean growing state, dropped 2%, compared with 20% growth the year before, hurt by drought as well as the broader market slowdown.

"A second straight year of drought limited Iowa's output - Iowa's corn production in 2013 was just 15% higher than in 2012, while Illinois's corn production was 63% higher and Indiana's was 74% higher," the bank said.

Illinois prices rose by 10% last year, while Indiana values gained 14%.

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